Consumer Financial Protection Bureau

The proposal to establish a federal Consumer Financial Protection Agency (CFPA) was at the center of the Obama administration’s overall plans to overhaul financial regulations. This agency, as created and named the "Consumer Financial Protection Board," would take certain consumer regulatory responsibility of financial products from seven other agencies and centralize it in one office. As originally conceived, it would have the authority and accountability to supervise, examine, and enforce consumer financial protection laws. It would be empowered to make rules, examine balance sheets and issue subpoenas. Any institution that provides consumer financial products such as mortgages, credit cards, student loans, auto loans, payday loans, and other consumer products, including payday lenders and mortgage brokers, would fall under the agency's jurisdiction. The agency would ban deceptive practices and oversee new consumer financial products.

Background

It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house. But it is possible to refinance an existing home with a mortgage that has the same one-in-five chance of putting the family out on the street... Similarly, it’s impossible to change the price on a toaster once it has been purchased. But long after the papers have been signed, it is possible to triple the price of the credit used to finance the purchase of that appliance ... The difference between the two markets is regulation.

After detailing various ways that the financial industry fleeces consumers, she concluded by calling for a Financial Product Safety Commission that would "establish guidelines for consumer disclosure, collect and report data about the uses of different financial products, review new financial products for safety, and require modification of dangerous products before they can be marketed to the public."

Bills before congress

The Consumer Financial Protection Agency is one proposal in a package of regulatory reforms requested by the Obama administration. H.R. 3126, The Consumer Financial Protection Agency Act of 2009, introduced by Rep. Barney Frank (D.-Mass.), specifically authorizes the agency. You can read the bill, here:

The House of Representatives folded the Consumer Financial Protection Agency Act into a larger reform bill, the Wall Street Reform and Consumer Protection Act of 2009 (H.R. 4173), which passed the House on December 11, 2009, by a 223-202 roll call vote.[4]

Detailed summary

The CFPA is just one aspect of President Obama's financial overhaul, the Treasury Department's Financial Reform Plan[5][6].

The CFPA Act (CFPAA) establishes a new agency to oversee consumer protection in financial services. It would subject federally chartered financial institutions to state consumer protection laws that have, in the past, been preempted and transfers authority to the Agency from existing statutory authorities. The Agency’s mission is to promote transparency, simplicity, fairness, accountability and access in the market for consumer financial services. The Agency will seek to ensure that consumers have, understand and can use the information that they need in order to make responsible choices about consumer financial products and services.

The Agency's job will be to ensure that credit, deposit and payment products and services and related products and services, are being offered in a fair, sustainable and transparent manner. The job will include quick response to emerging harmful practices, before they spread throughout the country or become large enough to undermine family economic stability or threaten the economy.

The CFPAA would:

Apply to “consumer financial products or services.” These are understood to include financial products or services that are to be used primarily for personal, family or household purposes.

Address all forms of credit, deposit, and payment products and services offered to consumers. It can also address related products and services such as prepaid debit cards, loan servicing, debt collection, and debt-related services.

Have the power to determine that products, features, or practices are unfair, deceptive, abusive or unsustainable. Its powers should include banning, restricting, or imposing conditions on practices, products or features, creating product standards, and requiring special monitoring, reporting and impact review of certain products, features or practices.

Require that all disclosures are clear, simple and concise.

Take a lead role in educating consumers about all credit matters. Review and streamline existing financial literacy programs.

Test disclosures regularly to see if they are clear and reasonable.

Have a five-member board - Four appointed by the President, and subject to confirmation by the Senate and the fifth is the Director of the National Bank Supervisor.

Provide a unified mortgage disclosure.

Require credit card companies to provide calculators that give payoff terms under different circumstances (i.e., only making minimum payments or paying off in only a year).

Non-preemption provisions

Preemption occurs when federal legislation overrides state laws and can dilute stronger state consumer protections. There are non-preemption provisions in the current version of the CFPA Act. The Agency will not preempt state laws unless state laws are inconsistent and are less protective than the national agency's rules. These provisions include[10][11]:

Federal law would preempt only inconsistent state laws and regulations, and only to the extent of the inconsistency. State laws and regulations that provide greater protection are not inconsistent.

Concurrent state attorney general enforcement is authorized. State attorneys general can bring any action in court to require banks to produce records relating to investigation of state or federal consumer laws or to enforce applicable state or federal law as authorized by such law.

Bush-era rules preempting state regulation of national banks, would be overturned.

It would assure that states could, for example, limit negative amortization and protect the right of states to regulate terms such as prepayment penalties on all mortgages, including ARMs.

Rulemaking constraints

An issue of concern for some observers of the regulatory process and regulatory agencies is whether an agency's regulatory authority requires agencies to do the best they can to protect the public or if, instead, they must conduct economic and other analyses and weigh considerations about the potential impacts of a regulation on business.[12] The CFPA would require the Agency to constrain its rulemaking authority in accordance with cost-benefit analysis and subject its regulatory decisions to extensive analyses and other hurdles:

Section 122(b) would require the Agency to "consider the potential benefits and costs to consumers and covered persons, including the potential reduction of consumers’ access to consumer financial products or services, resulting from such rule" in any rulemaking under the CFPA or other legislative authorities brought within the Agency's scope. The Agency would not, by contrast, be required to consider the potential harm to consumers when deciding whether to exempt companies from any of its rules.

Section 124(b) would require the Agency to conduct a "look-back study" or retrospective assessment of "each significant regulation prescribed or order issued by the Agency." Additionally, "[b]efore publishing a report of its assessment, the Agency shall invite public comment on recommendations for modifying, expanding, or eliminating the newly adopted significant regulation or order."

Section 131 would prevent the Agency from determining that a financial product or service was unlawful on the grounds of unfairness "unless the Agency has a reasonable basis to conclude that the act or practice causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers and such substantial injury is not outweighed by countervailing benefits to consumers or to competition."

Section 137 would require the Agency to regulate fair dealing with consumers only after considering, among other factors, whether "the benefits to consumers of imposing a particular duty would outweigh the costs."

Current regulatory environment

The current regulatory environment for mortgages, credits cards and car loans includes a fractured array of state and federal agencies[13]:

Federal Reserve

Office of the Comptroller of the Currency (OCC)

Office of Thrift Supervision (OTS)

Federal Deposit Insurance Corp. (FDIC)

National Credit Union Administration (NCUA)

Department of Housing and Urban Development (HUD)

Federal Trade Commission (FTC)

Justice Department

State financial regulators

State attorneys general

State auto dealer regulators

State attorneys general

Polling

According to a poll conducted by Caravan Opinion Research Corporation and released by the Consumer Federation of America[14], "57 percent of those polled support the creation of a new federal agency to protect consumers who purchase banking and other financial products and services."

President Obama remarks

On October 9, 2009, President Obama said the following as part of a prepared statement discussing the Consumer Financial Protection Agency proposal,

"The new Consumer Financial Protection Agency that I have asked Congress to create will have just one mission: to look out for the financial interests of ordinary Americans. It will be charged with setting clear rules of the road for consumers and banks, and it will be able to enforce these rules across the board.

This agency will have the power to make certain that consumers get information that is clear and concise – in plain language – so they can compare products and know exactly what they’re getting into. It will ensure that banks and other firms cannot hide behind those ridiculously confusing contracts – pages of fine print that no one can figure out. It will have the ability to enforce and build on the credit card reforms we passed earlier this year, so that consumers aren’t hit with unfair rate hikes, penalties, or hidden charges. It will require brokers to look out for the interests of families if they give advice about mortgages. And it will ensure transparency and fair-dealing for other financial products, like bank overdraft services and payday loans.

. . . We have already seen and lived the consequences of what happens when there is too little accountability on Wall Street and too little protection for Main Street, and I will not allow this country to go back there. It is time to move forward. It is time for real change. And I am confident we will get it done. Thank you."

Supporters of the CFPA

Supporters of the proposal include Center for Responsible Lending, National Association of Consumer Advocates, U.S. Pirg and more [15],